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The Kraft Heinz Company (NASDAQ:KHC)
Q1 2019 Earnings Call
Aug 08, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day. My name is Sherry, and I will be your operator today. At this time, I would like to welcome everyone to The Kraft Heinz Company's first-half 2019 earnings conference call. I would now turn the call over to Chris Jakubik, head of global investor relations.

Mr. Jakubik, you may begin.

Chris Jakubik -- Head of Global Investor Relations

Hello, everyone, and thanks for joining our business update. With me today are Miguel Patricio, our new chief executive officer; and David Knopf, our chief financial officer. We'll begin today's call with opening comments from both Miguel and David, and then we'll open up the lines for your questions. Please note that during our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ materially due to risks and uncertainties, and these are discussed in our press release and our filings with the SEC.

We will also discuss some non-GAAP financial measures during the call today. These non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release. Now it's my pleasure to introduce our chief executive officer, Miguel Patricio.

Miguel Patricio -- Chief Executive Officer

Thank you Chris and hello everyone. Well first of all I'm honored to be with you today as the new CEO of Kraft Heinz, as someone who has worked on some of the biggest brands in the world and I know intimately they have power in the marketplace and with consumers. Kraft Heinz has some of the globe's best roughly 200 brands in nearly 200 countries with nearly 20 of them maintaining the relevance for 100 years or more. We are in 97% of American households today holding the number one or two spots in 50 categories.

And I'm handled to follow the great CEOs that have successfully adopted our brands and businesses through periods of tremendous change over more than 100 years. These are great assets for any business. But at Kraft Heinz we have far bigger aspirations. That's why I want to candid with you from the start of my tenure here.

The valuation of our stock is now among the slowest in the industry and you deserve straight talk from me about how this business is run. I promise that to you today and for as long as I'm here. The entire board has mandated a new approach to Kraft Heinz. As such it's my job to tell you what we got wrong and why we got it wrong.

Over the coming months I will share more with you about how we fix it but it starts right now with me and our entire senior-management team. Our branded icons, it's our job to ensure they are leading icons. To do that we must understand the future so we can lead, not follow. We must understand the consumer better than any other company.

We have a good start on being data and process driven that we must put more attention on the consumer we face. For instance we have sophisticated tools to tell quality-made impressions versus those that don't reach the consumer. But we're also the company that had the first plant-based burger, the Boca burger, but find ourselves far behind the plant-based market today. Many of you believe our story as one of cost control and zero-based budgeting.

This has been strength to our company because they have enhanced our margins since the time of our merger. Without this discipline we would be in a worse place today. But we have to do more than that. We need to change so we can apply strong consistent investments in our brands.

There is no doubt our industry is in such a big moment of transformation, in retail, non-traditional channels, private label, communication, consumer values, health and well-being. This transformation represents a good opportunity and we as an organization need to be at the forefront of this change. My first 40 days at Kraft Heinz have been rich in learning with honest and candid conversations with our global leaders, employees as well as our customers. I have held numerous con calls, had one-on-one with more than 300 employees and had the chance to visit all of our major offices around the world.

Those conversations have left me with an enormous appreciation for the team that we have here at Kraft Heinz. Our team is hardworking and motivated to drive the next chapter of the business and the consistent message I hear from them is that while they've been through a lot, they still have a strong desire to win. Their commitment to the company is why I am privileged to be their leader. But before we get into my first impressions and thoughts on our path forward, I'm going to ask David to review our first-half results.

David Knopf -- Chief Financial Officer

Thank you, Miguel, and good morning, everyone. First off, with the filing of Forms 10-Q for both the first and second quarters, we expect to regain our current filing status with the SEC. The accounting review and audit process for our 10-K was a thorough and time intensive effort, and we restated past periods for misstatements that have occurred over the past four fiscal years. Overall, the magnitude of adjustments to our historical numbers was a cumulative impact from 2015 to 2018 of less than 1% of net income. We are now taking extensive actions to improve internal policies and procedures, and to strengthen internal controls, including over financial reporting. Today, we have already implemented a comprehensive disciplinary plan for all employees found to have engaged in misconduct.

Enhanced our organization, augmenting our procurement finance teams with additional experienced professionals in the area of supplier contracts and related arrangements as well as realigned reporting lines, so procurement finance now reports directly to the finance organization, and have enhanced the level of precision at which our internal controls for financial reporting for goodwill and indefinite-lived intangible asset impairment tests are performed. We're also in the process of reassessing employees' KPIs, and will be implementing checkpoints to evaluate the impacts from significant changes in the environment, as well as evaluating potential solutions to upgrade our procurement management software, and deploying a comprehensive global-procurement training program. Taking these steps to improve internal controls is of the utmost importance for our Board, Miguel and myself. It will continue to be a high priority for the organization going forward.

And I would like to thank all parties for their support and dedication, especially our finance and legal teams, our board of directors, our financial partners, among others. Regarding our first half performance, overall, while our consumption and share trends continued to improve, our first half results were held back by actions at a number of our retail partners in both the U.S. and Canada to reduce the amount of inventory they carry. We continued to suffer from higher supply chain costs.

And frankly, the absolute level of year-on-year declines in EBITDA and EPS are simply unacceptable. If you recall, in February, we set our priorities around improving our growth and returns by driving consumption and market share, and leveraging in-store sales and e-commerce investments to build our brands and grow our categories. So far this year, our retail takeaway in both United States and Canada have continued to grow and improve since the second half of 2018 and into the first half of 2019. In the United States, first-half consumption in measured channels was up 1.1% versus the prior year with market-share gains in more than half of our business.

In Canada retail-sales consumption grew nearly 4% in the first half, although this was aided by return to a more normal promotional calendar versus the prior year. And we've continued our strong push on condiments and sauces around the world with significant advertising and merchandising activity behind the Heinz 150 year anniversary. But on the whole, we are dissatisfied with our financial performance year to date, as well as the fact that retailer inventory reductions dampened our potential for the first half and the full year. In terms of sales for the first half, we outlined in February the sources of our organic net sales decline.

These included unfavorable promotional timing in both the United States and Canada as well as difficult comparisons versus an exceptionally strong prior year and UK soups. In addition to that we also saw negative impacts from lower inventory levels at retail in North America that we did not anticipate, as well as lost sales due to trade negotiations in parts of Continental Europe as we implemented good, better, best pricing in ketchup between our Heinz and newly repatriated Kraft brands. From a total company perspective, organic net sales were down 1.5% in the first half, including an adverse impact of approximately 1.2 percentage points from retail inventory reductions primarily in the U.S. and Canada.

Volume mix was relatively flat in the first half as the reduction in retail inventory levels more than offset consumption growth in the United States, Canada and Latin America. Pricing was negative, down 1.3 percentage points, driven by three factors. The first factor driving lower pricing was unfavorable timing of promotional expense, representing roughly 80-basis point decrease in price on a global basis, including approximately 90-basis points in the U.S. In the U.S., while we expected promotional timing to be a source of year-over-year decline in the first half, it should turn favorable in the second half of the year and therefore relatively neutral for the full year.

By contrast, the step-up in Canada reflects greater activity versus last year, including the natural cheese business that we just sold and it's not likely to reverse in the second half. The second factor was key-commodity driven pricing in North America, representing roughly 30-basis point drag on global pricing in the first half. And third, the remainder primarily reflects continued promotional support behind selects for select U.S. categories, mainly in our Launchables and frozen categories.

With respect to profitability, we spoke about our first quarter and indeed our first half being up against our toughest EBITDA comparisons for the year. This reflected our expected net inflation curve, stepped up fixed cost investments and retail channel growth, marketing and our people, as well as pricing not beginning to take effect until the second quarter. In the end, the cost inflation picture while improving remained unfavorable versus the prior year across packaging, manufacturing and logistics in the United States. And this together would stepped up fixed cost investments drove roughly half of the constant currency production in first half EBITDA we saw versus the prior year.

Regarding adjusted EPS, the decline we saw in the first half reflected lower adjusted EBITDA, as well as higher depreciation and amortization expenses versus the prior-year period. Other income and our effective-tax rate versus the first half of 2018 were more favorable than we expected, such that in total below the line items were a $0.02 benefit to adjusted EPS versus the first six months of 2018. From a forward-looking perspective, we have now completed the two divestitures we previously announced: India nutritional beverages and Canada natural cheese. These divestitures resulted in a combined after-tax proceeds of more than $1.5 billion.

And we remain committed to using those proceeds to further deleverage and strengthen our balance sheet. However, I will highlight here that with regards to our effective tax rate, we continue to expect roughly 21% for the full year. The first half was only 18.4% due to the timing of discrete items, but this benefit is not expected to repeat, resulting in a higher rate in the second half, especially in Q3. And for the second half of 2019, specifically, we continue to expect to see an improvement in year-over-year top and bottom-line growth rate versus what we saw in the first half.

This should be driven by continued momentum in consumer offtake and more innovation coming to market, improved pricing trends, particularly as our price increases in the U.S. take hold and lapping some of the stepped-up fixed costs and cost inflation that we saw in the back half of last year. Although I would note that we are seeing risk from further reductions in retailer inventory levels, as well as accelerating key commodity costs in the U.S. that we had not anticipated at the start of the year.

Now I'll turn it back to Miguel.

Miguel Patricio -- Chief Executive Officer

Thank you, David. I'll start by saying that the level of decline versus previous year is nothing we are proud of, and nothing that any of us should find acceptable moving forward. And while I have officially been the CEO for roughly 40 days at this point, I think it's important to make a candid assessment of where I think we are today. At the outset, I shared many of the concerns that a good number of you have expressed over things like from support, supply chain execution, to sustainability of our profits, and just how long it would take to be in the position to start growing both the topline and the bottomlines.

And our oard of directors made it clear that they wanted to bring change in light of the company's recent new steps. They have given me their full support to contemplate any tasks that will create long-term sustainable value for our shareholders. So far, I have found as you might expect, things are rarely as bad or as good, as what you read from the outside. What is clear is that we win when we strongly and consistently invest in our brands.

For instance, thanks to innovations and investments to extend a 150-year old brand into new segments, Heinz has achieved an all-time-high market share in U.S. ketchup reaching 70% in the second quarter. And Philadelphia has consistently grown share and grown the category year over year since 2014 with 68% share year to date by setting the standard for superior quality and taste. We have also built a world class quality organization that has had the fewest recalls in the food industry over the past four years.

Since 2015 we invested more than $1 billion of capex in North America alone including significant investments on the end of the line for detection, risk avoidance and consumer-complaint mitigation. These are just some examples of great things I have seen at the company in my early days. But it's also important to face the cold hard facts and assess where we have had shortfalls. First and foremost the company had a significant decline in adjusted-EBITDA margins from a peak of 29.4% in the fiscal 2017 to roughly 24.5% for the trailing 12 months through the end of June this year.

This was driven by a combination of inflation in our supply chain, including packaging, freight, overtime, and maintenance costs, as well as significant step up in fixed costs to support sales growth with price increases lagging higher costs. Regarding our supply chain problems in 2018, it's clear we lost forecast accuracy and our ability to execute productivity initiatives to offset market inflation. I believe we persisted with integration-minded cost cutting and did not give it to a continuous improvement productivity driven mindset soon enough. Before I arrived the company started to take actions to make sure this doesn't happen again.

But I see opportunity to go further by bringing in more technical expertise in critical areas, by improving collaboration and process between our category and supply chain teams, by doing a better job of understanding root causes of supply chain losses and this needs to be supported by our finance team leading across functional efforts to improve visibility. So one of my main priorities now and going forward is to make sure we have a much better visibility in our supply chain as well as more robust ongoing productivity initiatives. I believe this critical part of the company should and can generate significant productivity. If we have the proper visibility we can build a solid pipeline of efficiencies-oriented initiatives across our value chain. Moving to our fixed costs, since 2015 we have taken out significant costs from the business.

We also reinvested roughly $300 million last year in areas like people, go-to-market capabilities, marketing and innovation. To be honest it's too early for me to tell which investments will generate the returns we expect. But my experience tells me that whenever there are a lot of big investments in such a short period of time it's difficult to see all of them working at once. It's therefore critical that we prioritize the ones that are working and that stick the strategic agenda that we're currently developing.

And for the investments that are not working, we move those dollars to areas that may need more investment. As examples, I believe our investments in media remain low despite fixed costs and overall market spend increasing over the past two years. On the brand and innovation side, we need to become more consumer obsessed so we can better predict their behavior even before they know it. There are practices that need to change in the product development process, so we can be faster and more customer-centric with our new products.

And we need to better balance spending and marketing, innovations versus core brand support. And in terms of retail-channel development, Kraft Heinz has grown rapidly and has had strong share performance in e-commerce that we really need to take a step back and develop a longer-term outlook for the channel growth, and how Kraft Heinz can win and assess the incrementality of each customer. So it's not just about cutting costs. It's becoming more about efficiency, and making dollars already in outer base, work harder elsewhere. Let me turn now to my priorities and the opportunities I see ahead of us.

When I became CEO last month, I established three immediate goals with the Board. The first, which should be obvious, is to get to know our business, our consumers, our customers and my colleagues. The second is to execute our existing 2019 business plan. The third and most important is to read a comprehensive review to develop a new strategic agenda for the next three to five years.

It is critical that we get the organization to concentrate on setting our strategic directions, and laying the foundation for our future, now. We need to ask ourselves the hard questions about our business, not speaking about the short-term or the next quarter. And we need to take the time to seek out external and internal inspiration and do on best practices, both with Kraft Heinz and from other world-class brands. From a financial perspective, we do expect many of the top and bottom-line factors that fell back in the first half to fill in the second half.

But I've asked David that we not provide or update specific point estimate, financial guidance. Setting short-term targets publicly won't be productive as we set and work to deliver against our strategic directions and priorities. In addition, as I'm learning the business and develop our strategic agenda, I want us to spend more time evaluating the questions of the investors. We absolutely remain committed to our investment grade credit rating, with our more urgent priority is to get the organization fixated on our consumers and customers.

And in this process ensure we don't rush to give away potential value to others. We have already started to work and taking some early actions to put in place the right team and the right structure to help achieve my three immediate priorities. As you may have seen my first act as CEO was to make some changes in our structure to help accelerate our progress. First, I have taken on the U.S. President role on an interim basis. U.S.

represents 70% of our company and this will help me understand consumers and the customers faster. For me this big dive is an essential step to developing the right plan that drives sustainable growth and shareholder value for Kraft Heinz. I also established a new role International President for Kraft Heinz combining our EMEA, Asia Pacific and Latin American zones representing 20% of our global business. We did this to create streamlined, more robust international structure, refine commodities, refine their strategy and drive the business with greater speeds.

We will continue to share more of our approach to the strategic agenda over the coming quarters. We expect to complete our work by the year end. And then facilitate sharing our conclusions with you early next year. As we do this plan my experience has shown that to truly change the momentum of a business we must understand the future identifying where the consumer, where needs and the marketplace are headed.

And then invest quickly and consistently to make sure our core brands will serve those needs better than the competition.Further, I believe we can and must find internal efficiencies whether in our supply chain or fixed cost based that had both increased substantial in our last two years that can help to fund this strategy. This discipline is a virtue but it's not an end in itself. I believe great companies are the ones that keep expenses in the control so they can use the capital for new investments that grow both the topline and the bottomline. It's not one or the other.

As I look ahead I'm very excited about the opportunities at Kraft Heinz. Similar to my attention to consumer, customers and colleagues, I also look forward to engaging with the investment community over the coming months and quarters. Now, we would be happy to take your questions.

Questions & Answers:


Operator

[Operator instructions]. Our next question comes from Andrew Lazar of Barclays.

Andrew Lazar -- Barclays -- Analyst

So first from me a little more broadly. As you mentioned there's been so much written and said about Kraft Heinz really just into even 4Q results in February, which immediately feels like a lifetime Miguel. It's a little hard to know from the outside I guess what range true or not. So first off, perhaps if you could just go through a little bit of specifics on what you see as some of maybe the biggest misperceptions among investors at this stage, both positive and negative? And then I just got a follow up.

Miguel Patricio -- Chief Executive Officer

Sorry, I'm not going to comment on rumors or on speculation about what people think about Kraft Heinz. But I'm glad to tell you why I'm optimistic and why I'm here at Kraft Heinz. I really believe on the power of brand it's got. And I think that we have an amazing portfolio of brands, some are shiny, some are not.

But I think the heritage that we have in the brands, the household proliferation that we have, the awareness that we have makes me feel very positive about the possibility of turning around some of the trends that we have in the brands that are not doing as well. I also think that we have a great scale. And that is a very competitive advantage in America.And I am also very, very excited about the possibility of turning the business around. I have done it before in my life and I think that it is possible.Now to take a business around, I think it's critical that we define comprehensive strategy.

And this strategy has to be based on understanding the future, understanding the consumer. I believe that if we have -- the industry is in huge transformation today. And transformation is also a moment of opportunity. And the ones that are going to take this opportunity are the ones that will understand the future better than the others.

So they will lead. The ones that will not understand will follow. And the followers will not win. So we need again to set a comprehensive simple strategy for the future and be very disciplined on making and executing them.

So, I'm very excited, I am much more excited today after 40 days than I was on day one about our future.

Andrew Lazar -- Barclays -- Analyst

Thanks for that. And I know you're not ready to address, obviously, what you see is sort of a more sustainable margin structure for the business yet, going forward. But as you mentioned, EBITDA margins have sort of come in some 500-basis points or so in the past three years. Some of that's been reinvestment, whether in marketing or capabilities, and some has been related to other items, but margins are still well above the Group average.

So I guess my question is, do you think Kraft Heinz with its sort of geographic portfolio and relative market-share makeup, should be able to sustain a margin structure still well above the group or not? Because in your prepared remarks, I think you talked about more efficiently using the spending that's already in the base. Thanks so much.

Miguel Patricio -- Chief Executive Officer

Yes. Thank you Andrew. Well, let me start saying again that I truly believe that we need to invest much more, especially in our people, and our brands. I think that as I said before that our media investments are below where they should be.

But before going after new investments, I would really look at the possibility of inefficiencies in the system so I can reorganize and redeploy these investments. I am still -- of course, it's early to talk about it but I'm seeing a lot of inefficiencies and this could bring us big opportunities. I'll give you just two examples so I'm not so theoretical. In marketing, we increased investment in the last two years.

But in media, we've been declining. We grew investments or we put money behind many other things, agency fees, production, research, product development. But the thing that the consumer really sees, we declined to pay the other expense. This was in our inefficiencies that we can redeploy.

I will give you another example, maybe because of all the complexity that we put in the system, our supply chain losses have been increasing actually double-digits in the last years, that's not acceptable. We need to understand very well the root causes of the supplier-chain losses and that to reduce them. We got losses that can be converted in investments. So just two examples of inefficiencies that I have seen very early here in my job.

And this has to be my focus before talking about new investments and reducing the margin. I'd be going after inefficiencies, that can put best in the system to feed the growth and seeing them.

Operator

Thank you. Our next question comes from Chris Growe with Stifel.

Chris Growe -- Stifel Financial Corp. -- Analyst

Hi. Good morning.

Miguel Patricio -- Chief Executive Officer

Good morning Chris.

Chris Growe -- Stifel Financial Corp. -- Analyst

Good morning and welcome Miguel. I just want to ask a question. You spoke about -- and I had a benefit of listening to your comments there about needing visibility, improving processes, bringing new technical expertise. From a high level that sounds like that's a lot more blocking and tackling, basic improvements would be made to Kraft Heinz in order to get the business to where you would like it.

I'm just trying to get a sense of, for the timing or expense or something to understand. Those factors, those items that have kind of missing at Kraft Heinz today that -- how long you're talking, how much do you think it will cost to get the company to the point where you think you a visibility you need and the processes in place to better grow the business?

Miguel Patricio -- Chief Executive Officer

OK. So Chris let me go back a little bit in time, Kraft Heinz. I think when you put two companies together, the first cycle or first phase or first cycle has to be really about bringing new culture and extracting inefficiencies. I think the company did a good job on that.

We extracted a lot of efficiencies. We passed a lot of costs. But then after two years, it's hard to continue to cutting costs. You need to change the strategy or you need to change the path.

In the first year you have two CEOs, you cut one CEO, so that's cost cutting but the following year don't have another CEO to cut. Cost cutting is a one-off activity and it is necessary when you have the opportunities. But then you have to move and you have to think about how do you reduce costs but in a different way and that way is really -- you have to change the way of operating the business, it's about efficiencies, it's about making better everyday forever. You need to change the mindset.

And if you reduce cutting costs trouble, you can get in trouble. I think that this second phase starts now with me. Yes, it could have started before and I think the company would have benefit from that, but it didn't. And so it starts now with me and I'm going to put a big emphasis on that, not on cost cutting but on efficiencies in the system, extracting efficiencies from the system, making better every day, making our factories much more efficient, making our execution in sales much better, making our marketing investments, as I mentioned before, much better as well.

So we invest on things that consumer see, not on the consumer doesn't see etc., etc. Hopefully I was able to answer your question, Chris.

Chris Growe -- Stifel Financial Corp. -- Analyst

Yes, that makes good sense. And thank you for that color there. I had a quick question for David. Just do you expect -- you're not giving guidance for the year, but if you could provide us some context around FX and variable compensation and non-key commodity? Are those figures you can update today David or you would wait to get more information on those?

David Knopf -- Chief Financial Officer

Yes, Chris, thanks for the question. So, like Miguel said, we're not providing at this point guidance. But I can give some additional color on some of the items below the line. So we continue to expect up to $0.25 of unfavorability below adjusted-EBITDA line for the full year relative to 2018.

And this negative impact will be greater in the second half relative to what we saw in the first half for a couple different reasons. First off, the largest driver is tax. We have some discrete benefits in the first half, whereas we expect some discrete costs within the back half of the year. Second, we did see some FX favorability in the first half in other income that may flip in the second half.

Third, related to incentive-based comp, will have a significant expense in the second half of the year. And this is due to the timing of the delayed filings of our 10-K and our 10-Qs whereas we typically expect that to happen in the first half of the full year. And then finally, we may see some higher interest expense in the second half as well.

Miguel Patricio -- Chief Executive Officer

Maybe let me add on this point, Chris, because I believe this was a big disappointment for you that we're not giving you guidance. And I'll go further a little bit and tell you why? First, because I believe that for Kraft Heinz -- and now we need -- what we don't need is to be focused on internal -- on profit targets on the short-term. We have a big agenda to build. We have a second half to deliver.

But I think that working on short-term targets will not help. But second, since I've been here just for 40 days, I wouldn't feel comfortable about giving a guidance, that I still do not have the necessary confidence about this number. I'm not sure if I'm going to overachieve my second half if I'm going to underachieve or I will achieve. When -- in this situation, when managers look at the leaders always with empty pockets, right, like they don't know me yet, but what I know is that in the second half some of the pressures that we had in the first half will face pressures like supply costs, or even commercial costs and that is positive. However, there's also risks, and risks such as further retailer inventory reductions, commodity inflation in categories where private label has had a lot of success, like natural cheese, meat, and coffee. But one observation that I made early on is that from a seasonality standpoint, historically, Kraft Heinz usually earned 60% of the 50% -- at least the 50% of the EBITDA in the first half of the year, but that's just an observation.

So we will see how we do.

Operator

Thank you. Our next question comes from Bryan Spillane of Bank of America.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Hey, good morning everyone. So first question from me I guess, we've gotten this a few times this morning on just how we should be thinking about confidence in the dividend going forward, particularly in the context of at least I guess not having the EBITDA guidance we had before. So if you could just talk about how you are thinking about the dividend and what factors may or may not affect it?

David Knopf -- Chief Financial Officer

Sure, Bryan, this is David. Thanks for the question. So, as we said before we are committed to our investment grade rating and we firmly believe that our business today generates sufficient free cash flow to support both delevering organically over time as we've committed as well as to support the current dividend payout that we have. On top of that we have taken actions as you know earlier this year to accelerate the delevering producing our dividend and successfully divesting India beverages and Canada cheese businesses a couple of digits multiple.

So again we feel that the business currently generates sufficient cash flow to cover the dividend and also to delever organically.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

And then Miguel, just you're going to the process of reviewing the business. There has been some commentary in the past about potentially just evaluating the portfolio, and gets implied additional asset sale. So could you just provide your perspective not so much on what you might be thinking about doing but just probably more from a higher level just how you think about asset sales in terms of how they create value, don't create value? Just what parameters you're thinking about in terms of what would tend you to do something along those lines.

Miguel Patricio -- Chief Executive Officer

Bryan, nice talking to you, I don't want to be evasive on your question. But actually I don't want to talk about divestitures or non-divestitures until we make our strategic decisions. I think that has to get consequence after what portfolio you're going to carry for the future and only after refining and having these approved with our board and discussed and approved, I think we should be talking about divestitures. For that reason at this moment, that question is not undertaken.

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

OK. Thank you.

Operator

Thank you. Our next question comes from Ken Goldman with JP Morgan.

Ken Goldman -- J.P. Morgan -- Analyst

Hi. Thank you. Just a clarification and not to beat the dead horse, but you do already have guidance of the year, right, you've talked about positive organic sales growth and adjusted EBITDA of $6.3 billion to $6.5 billion. I just want to make sure I understand, are you officially pulling this guidance or you're just opting not to address it today?

David Knopf -- Chief Financial Officer

Hi, Ken, this is David. So that's right that we're not providing guidance for the full year so we're pulling guidance. But I can provide a little bit of color on our expectations for the full year without giving an updated point estimate for sales or EBITDA. So like I said before we do expect to see better year-over-year performance on top and bottomline in the second half versus the first half and some of the drivers are what's consistent with what we said in February and there is some new potential risk to that as well.

So what hasn't changed versus our expectations in February are continued retail takeaways that we've seen in the market with U.S. consumption of 1%, Canada consumption of 4%, and that we expect we continue to be supported by accelerated innovation in the back half. And we've also seen some promising growth globally in our food service business as well. On top of that, we expect to see improved pricing trends in the back half of the year versus what we saw in the first half. And this will happen with some of the trade timing overlapping, as long as the price increases in the U.S.

that we implemented later in the first half that will fully lap in the second half as well. And then finally, on the positive side, as Miguel mentioned earlier, we do expect to see improving cost inflation as we start to lap some of the higher costs that we had in second half of 2018. We have changed versus our expectations in February as we progressed through Q2 is we see risks for further retailer inventory reductions in the second half. Although we can't say what that may look like, we do see additional risk.

And on top of that, we also see risk from accelerating key commodity inflation, particularly in the U.S. in meats and dairy but we will definitely try to manage via price, but could be a risk to us in the second half. And then finally, we also have some potential adverse-currency translation versus our expectations in February.

Ken Goldman -- J.P. Morgan -- Analyst

OK, thank you for that. I appreciate it. And then my follow up. Miguel I know you're not ready to really talk about this in detail, and I understand it.

But there's been a lot of talk today about supply chain, shifting the mindset of going from a merger-savings model to ongoing productivity. But is there anything you can give us specifically in terms of what's really going wrong on the topline? I know you mentioned media spending having gone down and so forth. But just your initial take, because to me that's the most important thing that Kraft can to do to turn the story around is to reverse the top-line trend. So if there's any specifics you can share with us right now that'd be great?

Miguel Patricio -- Chief Executive Officer

I think that we need to have a big focus on both bottomline and the topline. Maybe in the past, we were too focused on the bottomline. We need a strategy, first of all for growth, which is critical. We need to find opportunities, find white spaces, what brands to invest, what channels today that do have lower share, what channels should I invest more, and structure for growth, what countries where we should attack and grow and bet on.

And these will all be part of our strategy for growth. So examples, just I was talking here with my colleagues that, a country that I know very well, China. In China we have a very good business on soy sauce. We are leaders in two of the provinces, Guangdong and Fujian, that's two of the most -- the richest provinces.

But we are only three. It's a business or it's a industry, soy sauce is an industry $12 billion, it grows 8% per year. And we have great activity there. But we are just in two province, big opportunity to grow outside of this province.

There is the big opportunity to have other sauces not only soy sauce. Why haven't we done it? I don't know exactly. But I see this as big opportunity for white space but we have to organize ourselves for growth. It's also good policies, mindsets that we have to do it.

And to fund -- and we have to work on the other side, to fund these growth initiatives. We have to be very efficient. We need to be more efficient than everybody else. And to tell you the truth when I came and when I arrived here I was absolutely sure that I would find these opportunities for growth, I was not sure if we had to opportunity for efficiencies because I didn't know the business.

And today I know that we have. There are many other white spaces like in the West, talking about ethnicity, 20% of the population in America is Hispanic and represents 40% of the growth of the population. We don't have absolutely anything in our portfolio today to attend this population. We don't even communicate to the Hispanic community.

That gives an opportunity. So I'm looking at these opportunities everywhere from a brand standpoint, from a channel standpoint, from ethnicity standpoint, from a country standpoint. And this will be only tools that we will put in our plan that we will present to our board at the end of the year and to you at the beginning of next year. Hopefully, I was able to answer your question.

Operator

Thank you. Our next question comes from David Palmer with Evercore ISI.

David Palmer -- Evercore ISI -- Analyst

Welcome Miguel. Supply chain savings or like it rather was cited as a big reason for the last 2018 shortfall. Where do you believe your supply chain costs not, just the competencies, are relative to where they should be? And I asked because I think there is a lot that wouldn't be surprised to hear some of the investments needed given the stories we heard out there, not just that the savings are not there as the company stated last year? And I had a quick follow-up.

Miguel Patricio -- Chief Executive Officer

Look the good news is that the service level that we had in the first half I think were the best I don't know if ever or in the last year but were very, very high and very, very good. So that is a good news. And I whole credit give to the changes that were made not by me that was way before on the leadership of supply area. So this is one part and we are putting things in place, at present we're working on simple things which is basically the execution.

We are in a much better place. For the future what we did was to open a front both with inside and outside or external people or talent to help us define what is good match for efficiencies for the future. We opened eight fronts that go from supply chain losses to service level that go to people, that go to cost, it's productivity on the line and these are not projects, this will be a way of living. We've been too focused on the present and literally on firefighting, there is a fire there, let's extinguish the fire.

We need to work on our competencies for the future with the mentality of make it better every day. Again, this is a mentality shift that I lived before in my life, in my professional life that I know what it means and will come forever. This will feed our future in supply, in service level, but also on cost through doing things better, through efficiencies.

David Palmer -- Evercore ISI -- Analyst

And just a quick follow up, there was some reinvestment that was made last year I think was it $300 million in some levels of brand support. You said that there's some inefficiencies there. But as far as the return on that investment, and return on any investment you're making in marketing your brands in the categories that you're in, do you feel like there are enough microcosms or individual success stories that you can build upon here? And what would those be? Because I think there's a lot of questions about return on any marketing investment in some of the categories that you're in. And thank you.

Miguel Patricio -- Chief Executive Officer

Look let me start with progresses. Consumption is that -- we haven't seen consumption up for a long time, share are flat. And I would say the same here in terms of -- and I have here reports from Neilson with 21 categories, 13 of them have positive shares in the first half of the year. So I could argue with you that some of -- there are a lot of investments that are working.

I would mentioned, Heinz Ketchup, with the innovation that we had, and the communication is a very good example. Innovation to premiumize the brand, launching organic versions, no added sugar, that we can charge more that have higher margins. And that helps us well, the image of the brand. And that is a very good example of what to do.

We put more money behind the brand and we achieve all kinds of shares, 60% to 70% share. That's a good example. So, but on the other hand again as I said, I think we can do a much better job on focus on investments on core brands, not dilute at among a lot of brands and small brands, do more innovation on big brands instead of launching too many new brands, having innovation is more incremental and not dilutive. I think we did a lot of brand extensions but not enough of accretive innovation.

So there is a big homework to be done in marketing. I don't think everything is wrong at all and there a lot of good examples but we could -- we can do better and consistently invest in our brands.

Operator

Thank you. Our next question comes from Jason English with Goldman Sachs.

Jason English -- Goldman Sachs -- Analyst

Hey, good morning, folks. And welcome Miguel. Two questions from me as well. And you probably just kind of touched on it by referencing consumption and market share trends, but appreciate the commentary on the reinvestment into people, in media and maybe in some white space opportunities.

A lot of investors we speak with have also questioned whether or not investment may be necessary in price whether it be to narrow price gaps with private label, or change the economics of retailers to incent and to focus more on your brands. I would love it if you could just maybe comment on that on where you where you see these price gaps and the retailer economics today and whether or not you think you're properly aligned?

Miguel Patricio -- Chief Executive Officer

Look, I think that the pricing is an area of opportunity. And I would even say that both pricing, revenue management overall. But specifically on pricing I think that on categorires that we lead we need to meet the pricing and maybe in the past it took us too much time to pass inflation and we suffered with that. I also think that pricing -- averages on pricing are dangerous because we have brands like Heinz Ketchup or like Philadelphia that industry innovation -- or not innovation, we have been able to track price and we continue growing and we're achieving all-time highs in that market share.

But of course we have more pressure on categories where we have more competition from private label and where kind of more driven by commodities like cheese. So David mentioned before that yes, one of the risk we have in the second half is because cheese -- the commodity of cheese is increasing dramatically, the price of cheese and we're tracking price and we are expecting private label to follow, but we don't know if that's a risk. So that would be my comment on pricing, but I would like to go beyond, I think opportunities in revenue management exist as well. I think we can do a better job to maximize the discount.

Discount is a big investment and I think we can be much better on allocating discount by count, by product throughout the year, understand better what works in what way and when and how. And I also think that innovation can play a big role on revenue management and as a consequence on pricing. So I think there are good opportunities in this area to explore moving forward.

Jason English -- Goldman Sachs -- Analyst

Thank you, that's helpful. And my last question, I appreciate that you guys don't want to box yourself in with specific guidance for this year, but you did have another impairment charge fairly sizable one related to a new five-year operating forecast or revised expectations and priorities. I was hoping you could put a little more context around what is changing as you look out over the next five years versus maybe where your expectations were at the end of last year?

David Knopf -- Chief Financial Officer

Jason, this is David, thanks for the question. So on the impairment side, first off our impairment testing as you know occurs in 2Q every year. And so we performed our testing procedure this year after we file the 10-K current concurrent with preparing our Q1 and Q2 financial statements. And then to reiterate these are preliminary numbers that we disclose in 8-K.

So the preliminary impairment charge in the first half were driven by two main factors. So first off, as you said we did have revised expectations in response to current-market factors in some of our international businesses that were evaluated during the first quarter of 2019 as we developed these five-year plans. And as a reminder these are EMEA East reporting unit, LTA Exports reporting unit and Brazil where we had an impairment.Secondly, we also had the application of a higher discount rate to reflect the sustained decline in our stock price since the start of the year. And also you should keep in mind that we did start the year at nearly $60 billion of goodwill and indefinite-lived intangibles with less than 20% attrition relative to carrying value.

So what that means is there's going to be risk of future impairments, given any change in forecasts or modeling assumption can particularly trigger that. And to answer your question specifically, as we kind of updated develop these operating forecasts, we did have lower revenue and margin expectations, specifically for the three reporting units that I mentioned, EMEA East, Brazil and LTA Exports. The six brands that were impaired within Q2 were driven by the increase in the discount rate, which again, was reflecting the sustained reduction in our stock price since the start of the year.

Jason English -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. And our final question today will come from Steve Strycula with UBS.

Steve Strycula -- UBS -- Analyst

Hi. Good morning and welcome Miguel. A very short opening question then a little bit more of a strategic one. So the short question would be, as you think about the strategic review, when should the investment community as a whole kind of expect to receive the output of the notification? And then from a strategic standpoint, wanted to understand, given your experience at ABI, a different industry, what are some of the similarities and dissimilarities relative to Kraft's portfolio that you observed? And how that ultimately impact call it the earnings power of the company? I recognize your private label is low in that industry, but how does that kind of shape your view with the current portfolio they're working with? Thank you.

Miguel Patricio -- Chief Executive Officer

OK, Steve, look, we'll update you through the rest of the year on how strategic work is going. But it's our intention to share with our board at the end of the year, and then sharing with you at the beginning of next year. Now talking a little bit about my experience with food -- well with beer and how this has -- can be adapted to food, I think there are a lot of similarities, but there a lot of differences as well. And I think this has been actually pretty good, arriving here with fresh eyes and asking questions that some were obvious, but people were not asking themselves for a long time. Some were not obvious and they have not been asked about it before.

And so this has been positive. I think that my experience in the past both from leading global brands at ABI and using premiumization are the ways to grow top-line was very interesting. When I was Head of Marketing, ABI had been growing substantially because of mix, because of premium brands. And I think actually this is an opportunity for the industry.

That is a bit of premiumization going on. But the premiumization actually is coming much more from the small players not from the big players. But let me share with you another experience from my past that I think we can adapt here at Kraft Heinz. I ran our business in Asia, and China has been the best story of organic growth for ABI.

And the reason why we succeeded was because we understood the future of business in China better than anybody else. And we understood that economic growth would bring huge premiumization, wealth, the channels will change -- channel would grow immensely. And so we made all the best in the future. We made all the best in what would grow, not what was big necessarily.

And that happened. And making that parallel with Kraft Heinz, I think it is critical for us. Yes, we need to navigate through the present but we need to build a strategy for the future. We need to find where this business is going to grow, where food is going to grow and be ahead of everybody else.

In terms of China we understood that much even than the local brewers. We understood China better than them. And I think that -- again this is why I was talking about the future before. If we understand the future and we believe the future we're going to win and the ones that will not understand will just follow.

And I really want to be in the first group not in the second group. So as I said before, there is big transformation in food, negative people would be afraid of that. I'm an optimistic by nature and I believe that this transformation is an area of big opportunity, it is the one that will understand the future, are the ones that are going to win and will be those. Well this was the last question.

I just would like to finish just by saying a couple of words maybe summarizing of little bit of what we talked during this call. I wanted to tell you or to report how excited and how delighted I am with the opportunity to take Kraft Heinz to the next level. I'm, the way that you are, disappointed with the first half results. But I'm determined to rebuild our business momentum.

I have our board support and not only support and expectation to have a new direction and move forward. And for me there are no sacred cows, no preconceived ideas, just fresh eyes and just thinking about what is best for our great company. I know there's a lot of headwinds but I see also encouraging solid consumption trends that are very positive. But we must continue to work our portfolio, our strategy and in fact strategically to put ourselves in a position for top-line and bottom-line growth.

We need to improve our speed. We need to become absolutely obsessed with the consumer and understand the future better than anybody else. We need to pivot from a cost-cutting mentality to a continuous improvement, efficiency focused. And we need to strengthen the balance sheet.

That remains a priority. So thank you very much for your time. I'm delighted to be here with you today. I am really looking forward to knowing you personally and to be sharing our -- my views and to learning from you as well.

Thank you very much.

Chris Jakubik -- Head of Global Investor Relations

Thanks, everyone for joining. For analysts who have follow up questions, Andy Larkin and myself will be available and for those in the media Michael Mullen will be available for you as well. So thank you very much and have a great day.

Operator

[Operator signoff]

Duration: 70 minutes

Call participants:

Chris Jakubik -- Head of Global Investor Relations

Miguel Patricio -- Chief Executive Officer

David Knopf -- Chief Financial Officer

Andrew Lazar -- Barclays -- Analyst

Chris Growe -- Stifel Financial Corp. -- Analyst

Bryan Spillane -- Bank of America Merrill Lynch -- Analyst

Ken Goldman -- J.P. Morgan -- Analyst

David Palmer -- Evercore ISI -- Analyst

Jason English -- Goldman Sachs -- Analyst

Steve Strycula -- UBS -- Analyst

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